Demoting Jamie Dimon Won’t Fix JPMorgan’s Poor Governance

May 21 (Bloomberg) -- Should the board of JPMorgan Chase &
Co. force Jamie Dimon, the bank’s chairman and chief executive
officer, to give up one of his jobs? Governance watchdogs,
shareholder advisory services and public pension funds say yes.
Other large shareholders, some prominent academics and the bank
say no. The company will reveal May 21 how many shareholders
support a proposal to separate the jobs (though the vote is
nonbinding).

We agree that JPMorgan, a giant of an institution with $2.4
trillion in assets and 256,000 employees, needs stronger checks
and balances. Yet we disagree that the only -- or even best --
way to achieve this is by forcing a demotion on Dimon. There are
other means to this end, including regulatory demands for more
capital to make JPMorgan safer.

It’s worth remembering that there are plenty of examples of
blowups at companies with separate chairmen and chief executives
-- Enron Corp., HealthSouth Corp. and WorldCom Inc. come to
mind, as does Barclays Plc with its recent problems over
interest-rate fixing. Meanwhile, Wells Fargo & Co., one of the
world’s best-managed banks, combines the chairman and CEO jobs.

What matters more than separating the top titles, the level
of board independence or the willingness of directors to show up
for meetings is a director’s willingness to question management.
Although Congress and the stock exchanges have tried, no law or
“best practices” guide can instill that commitment.

Intuitive Arguments

The arguments in favor of separation begin with the
intuitive: Overly concentrated power in one individual is rarely
a good idea. A CEO is supposed to lead the management team. The
chairman, along with the rest of the board, should set targets
for management and oversee their execution, without day-to-day
involvement.

Yet academic research doesn’t support the notion that
separate chairmen and CEOs benefit shareholders. Splitting the
two may even be harmful. A recent study out of Indiana
University found that the shares of low-performing companies
benefited when the chairmen and CEO jobs were split. The
opposite was true for high-performing companies: The shares were
often hurt by separation.

On the other hand, GMI Ratings, which evaluates governance
risk, found that CEOs who wear both hats are more highly
compensated and more closely associated with risk indicators
than their CEO-only counterparts.

Clearly, there is a need for more study and better data.
Only about 20 percent of companies in the Standard & Poor’s 500
have truly independent chairmen, leaving researchers with little
to go on. The lack of evidence may also rest with the fact that,
when the two roles are split, the change is often cosmetic. Some
chairmen, for example, are former CEOs or have other ties to
management that cancel their neutrality.

Which brings us back to JPMorgan. The bank Dimon has run
since 2005 may be too large for any individual to handle. One
indication, as Bloomberg Businessweek pointed out, is the large
number of regulatory and legal matters the bank is fending off.
The litigation section of its quarterly report takes up 18
pages.

The U.S. comptroller of the currency has been critical of
the bank’s anti-money-laundering controls. The bank agreed to
pay $88.3 million in 2011 to settle claims it violated sanctions
against Cuba, Iran and Sudan. It is still defending against
charges that it knew or should have known about the Ponzi scheme
of longtime customer Bernard Madoff. The Federal Energy
Regulatory Commission is looking into whether bank traders
manipulated power markets. And then there is the so-called
London Whale credit-derivative transactions, which caused the
bank to lose $6.2 billion.

Dimon Referendum

Rather than hold a referendum on Dimon, shareholders should
take advantage of JPMorgan’s annual elections for its entire
board. If they have concerns, they should push for a
housecleaning by nominating a new slate of aggressive directors.
Dimon’s board has seen just two changes since 2008. Bank of
America and Citigroup, meanwhile, have overhauled theirs since
the crisis.

Shareholders would also do well to create a true lead
director, one who makes sure the board has complete access to
management and internal documents, decides when to meet and
what’s on the agenda, and demands real explanations over trite
answers. JPMorgan has a variation of this with a presiding
director, but he has played a weak hand through the bank’s many
crises.

If we had to boil down the chairman’s job to one basic
goal, it would be to create value for shareholders. Dimon has
delivered on this score: JPMorgan remained profitable during the
financial crisis and last year had a record $21 billion in
earnings. The question shareholders should ask is whether he can
sustain that performance as the bank continues to grow and gain
market share. Unless the bank borrows less, raises more capital
and takes fewer risks, that will be difficult -- regardless of
whether Jamie Dimon has one job or two.